Everest Kanto Cylinders: Invest at cut-off

As the shift to cleaner fuels gathers momentum, Everest Kanto is likely to benefit from buoyant demand for cylinders.

Sowmya Sundar

AN INVESTMENT can be considered in the IPO of Everest Kanto Cylinders at the cut off price. The offer is to be priced in the Rs 140-160 range. At the lower end of the band, the offer is priced at 14 times, post-offer per share earnings, assuming growth of about 20 per cent in profits after the expansion of capacities.

The market for CNG and LPG cylinders, used for automotive purposes, is growing at a fast clip. Everest Kanto, being the largest domestic producer of high-pressure gas cylinders, will be positioned well to enhance its market share after the capacity expansion.

The opening up of a new market should sustain consistent earnings growth over the next two-three years for the company. The project will be located in Gujarat. Its proximity to the ports and refineries will be a logistical advantage for procuring raw materials.

The need for a clean fuel and the rising costs of petrol and diesel are leading to a shift towards cleaner and less-expensive CNG and LPG as fuel for automotive purposes. Taking a leaf out of Delhi's experience, other cities too are expected to shift to alternate fuels soon.

The Supreme Court has mandated that 28 cities should shift to CNG. This could open up markets for Everest Kanto and lead to higher growth rates compared to other user segments.

The primary hitch now is the availability of CNG. CNG is still not as freely available as petrol and diesel and is the main reason for CNG vehicles not taking off quickly. Delhi has now completely shifted to CNG after facing supply hitches in the beginning. Similarly, other cities too would follow over a period of few years.

The CNG automotive cylinder segment is the fastest growing market both in India and abroad. Countries such as Pakistan, Iran and Malaysia, too, throw up opportunities in this segment. Exports now account for 35 per cent of the revenues. This could increase as Everest Kanto explores other markets such as Iran and China, where the use of CNG as automotive fuel is gaining popularity.

The industrial segment, too, is witnessing growth due to the pick up in the manufacturing segment and the capacity expansion plans.

The use of piped gas in the residential and industrial segments when it takes off could drag growth in these segments. As the automotive segment is going to be the key growth driver, we do not expect a major threat for the sustainability of earnings growth.

What the offer document says: The money raised from the IPO will be used to expand capacity from 3.66 lakh units per annum to 7.04 lakh units. Post-expansion, the company will be the second largest manufacturer of high pressure gas cylinders in the world after Faber Industries SpA of Italy, (7.5 lakh units). The total cost of the project is Rs 105.7 crore. The offer covers 85 per cent of the total project cost.

Everest Kanto makes CNG and LPG automotive gas cylinders, cylinders used in fire fighting equipment, for storage of helium, oxygen etc for medical purposes, domestic LPG cylinders and cylinders for industrial purposes. Imports are negligible due to logistics, higher costs and demanding regulations. The company has predicted a 19 per cent overall growth in demand for cylinders over the next four years. The automobile segment is expected to grow at 26 per cent and the rest at 10 per cent on an average.

The company is planning to enter China (It has a tie-up with a local producer with a capacity of 1.2 lakh units per annum) and scale-up capacity to five lakh units. Offer details: Everest Kanto Cylinders is making an IPO to raise Rs 90 crore to part-fund the expansion of its manufacturing facility for high pressure cylinders in Gandhidham. The offer is to be priced between Rs 140 and Rs 160 through the book-building route. The offer opens on November 22 and closes on November 25. SBI Capital Markets is the lead book-running manager.

(This article was published in the Business Line print edition dated November 20, 2005)

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